Return on Investment (ROI) always proved a concept of limited value and extreme abstraction in government. How does one measure the ROI associated with a paratrooper sitting on the ground at the green ramp waiting to deploy in harm’s way? How is the ROI measured on a nuclear missile resting in its silo?

Several years ago, DCAA adopted ROI as one of its main arguments to defend (or excuse) the quantity and quality of their work to taxpayers. ROI was an alternative to other measurements such as audit productivity, down to 1.06 audits per year per auditor from 1.5 in 2012. Additionally, form your own opinion about the fact that DCAA wins only half of the fights that get past the auditors and are made by someone outside DCAA.

Let us not forget that one of DCAA’s critical missions, and long neglected by their own admission, is to preventor reduce costs associated with cost findings by auditing by approving or disapproving contractor’s business systems. I argue that developing and subsequent auditing of a compliant accounting system is a major return on investment for both the contractor and government. I will point out that DCAA recently developed and launched new tools that make major strides in this area with preliminary checklist forms and new audit programs that I believe will greatly enhance DCAA’s future efforts in this area.

I question how DCAA measures ROI as they include forward pricing ‘savings’ in the calculation. This is a classic example of counting your chickens before the eggs hatch. If a contractor proposes $100,000 in fringe benefit costs and DCAA only approves $80,000, DCAA counts the $20,000 toward ROI. Unfortunately, when the year ends the contractor may discover the fringe costs proved $110,000 and bill the government for the $30,000 in difference. To further complicate the issue, the incurred cost submission may propose a different number and the subsequent audit even a fourth number[1].

The irony of all of this is the development of the ROI model contributed to DCAA’s current crisis, the continued replacement of DCAA as incurred cost proposal auditors by outside accounting firms. ROI is now a dangerous temptation in evaluating ‘independent” accounting firms’ “success” in auditing incurred cost proposals.

In recent testimony before Congress, Industry complained that DCAA acted more like a collection agency than auditors. Imagine our response if this becomes formalized as commercial contractors are awarded contracts on their promises regarding return on investment.

[1] There is no indication that DCAA follows the potential saving through the entire chain. First, they do not report how they calculated the ‘savings’ and given the incurred cost proposal backlog of years, one would wonder about the practicality of going beyond the simplest and first number.

The scratched out areas were discussed in previous articles. Today, I am going to look at the last two areas, “Accrued costs crossing the fiscal year” and “Bonuses”. Again, I am not a lawyer and this is not legal advice. I am an accountant and there may be some accounting advice.

Accrued Costs Across Fiscal Years.

Twice in the ruling the government raises an objection to the allowability of TCI’s costs because TCI accrued them in one year and expensed them in a subsequent year. At least I hope that is the government’s objection as the only reasonable alternative opens up a can of worms that the government would appear blind to.

Here are the two objections:

The ACO also disallowed some of the bonuses because they were paid in March 2008, in the fiscal year after FY 2007, which is the subject of this ICP.

And

According to the COFD, this prohibition prevented TSI from submitting its legal costs contemporaneously with their being incurred, 15 but the reason that TSI gave the DCAA for submitting the costs in the FY 2007 ICP, instead of in 2006 (when it supposedly became aware of the fact that it was cleared of wrongdoing), was that it “forgot” (R4, tab 16 at 260). Mr. Fletcher (with whom DCAA was dealing and would have been the person who DCAA claimed stated that he “forgot” to include the legal fees in FY 2006) denies ever making such a statement to DCAA (tr. 2/212).

For its part, the government does not dispute the fact that the legal fees for the investigation, as subjected to the 20% discount, would otherwise be allowable (see gov’t br. at 62, 64 ), but argues that the fees were expensed to the wrong year (id. at 62-63).

In the first case, the Board ignored the timing argument and disallowed the bonuses for reasons we will discuss later. In the second case, the Board directly rejected the timing argument in reference to the legal fees and allowed the majority of the fees.

Over the years, I encountered this timing argument from only a couple of DCAA auditors. Auditors raised the argument rarely and we addressed it pretty quickly by responding that GAAP required the accruals. The question displays a limited understanding of accrued accounting which is forgivable in a young auditor working through the differences between cost and expense. It is a bit more difficult to understand when the limited understanding rises all the way up DCAA and into an appeal before the Appeals Board. It is disheartening to look at the Appeals Board teaching DCAA GAAP 101.

Let us start with a simple absolute rule: if a cost is properly accrued and recorded, this is only reconsidered if the original entry is invalidated. An example of invalidation would be a subsequent decision not to pay the accrued expense. I would also note that GAAP enjoys extensive procedures for addressing such a subsequent event.

Legal fees present some unique challenges in government contractor accounting. Legal fees are, in my humble opinion, one of the only reasons for suspense accounts, as I go into detail about in this previous article. As I recommend in this article, legal costs where the allowability is unknown at yearend should be capitalized (after being accounted for tax and financial statement purposes) and expensed out as either claimed or unclaimed when their character is recognized. This would be a GAAP compliant policy in keeping with government contracting requirements.

In order for the government’s argument to make sense — that the contractor “forget” (see above) and the contractor expensed them in the wrong year, there are only three reasonable possibilities: 1) the costs were not on the general ledger or 2) the expenses were not recorded properly in the first place (capitalized instead of expensed), or 3) the expenses were capitalized but not expensed properly (the wrong year).

Obviously, the first issue is the can of worms I mentioned earlier and, if true, we would be experiencing a completely different discussion.

The second possibility is one that major publicly traded corporations are often accused of – unnecessary capitalization to control earnings. Not something a tax paying small business if often accused of, and again the argument here would not be timing but why the expense was capitalized.

As noted above, GAAP enjoys extensive rules to address mistakes surrounding the third possibility and DCAA does not appear to raise these, especially in light of both times DCAA raises timing in this case (bonus and legal fees).

No, DCAA seems to object to the fact that the contractor wishes to charge the government in 2007 but not pay it until 2008.

Hm, isn’t that concept enshrined in the FAR at FAR 52.216-7? The one where a few DCAA auditors chastise contractors for not paying accrued expenses fast enough?

Come on DCAA, the real question is if the contractor reversed the accruals in 2008 before paying them or just expensed them again.

Bonuses

Bonuses or Incentive pay, present unique challenges for contractors. The issue is complicated by the specific and narrow regulations found within the FAR.

The Appeals Board quotes FAR 31-205.6(f) in its entirety but also utilized FAR 31-205.6(a)(6) when they refer to profits:

“This determination is buttressed by evidence that Mr. Fletcher considered the bonus pool to effectively come from company profits and the fact its distribution ca at the whim of TSI’s “in” group, justifying “close scrutiny,” Nolan Brothers, 437 F.2d at 1834, which it simply cannot withstand.”.

Every time a DCAA auditor brings up the ‘distribution of profits’ I respond, or am tempted to respond, that the statute defines the 401(k) as a ‘profit sharing’ plan and that is allowable.

I believe it is proper for DCAA, and in this case the Appeals Board, to use the IRS distribution of profits as a method for assessing unclaimed bonuses, I just wish they understood it better. The IRS standard is directed toward ‘C’ corporations that pay out all of the profits at year end as a bonus to avoid the double taxation inherit in ‘C’ corporations. But the rules work as a good method of determining what is a profit and what is earned compensation.

What every small business contractor wants is the right to award employees, at management’s complete discretion, for a job well done. I imagine the employees would like the same.

The regulations take all the fun out. In order to pass muster a bonus plan must be so well written that it is “an agreement to make such payment”. TCI failed this standard even after they thought they received DCAA acceptance.

So what is a poor small business contractor to do? Why the same thing the huge federal government does: avoid the words “bonus” or “incentive pay”.

Remember the GSA bonus scandals a few years ago? When the federal government handed out millions of dollars to employees despite poor performance? Look for the words “bonus” or “incentive pay” in GSA policies. The word “bonus” is there alongside another program not as extensively defined: “award”.

Contractors are free to develop well written and measurable bonus plans that meet the regulatory requirements. Contractors should also reserve the right to award employees for single or periodic exceptional performance (as does the federal government).

Of course awards are subject to audit and question by DCAA, but under the reasonable and prudent standard plus a possible excessive compensation argument.

The Ignorance regarding how DCAA works is not limited to contractors, but is prevalent (no surprise) among government acquisition staff. The ignorance found among the GAO appeals division is a bit surprising and disconcerting.

There have been several decisions recently supporting the acquisition staff’s positions requiring a DCAA approved accounting system. Bidders who are not “DCAA Approved” face disqualification or penalization in the bidding process. Look at my recent article on this issue.

In the famous words of Bugs Bunny “I knew I should have taken that left turn at Albuquerque”, the GAO has taken a strange turn moving government contracting out of the Twilight Zone and into Toonland.

Now, A contractor is not only required to bid with only an approved DCAA accounting system, but must have a positive assertion of the DCAA approval. The contractor asserting such and even providing the DCAA audit report number is now deemed inadequate.

Leader essentially argues that the solicitation required only that offerors have received verification from DCAA that their accounting systems had been audited and determined adequate, but did not require the submission of any documentation from DCAA itself.[3] Protest at 5-6; Comments at 3-4. In this regard, Leader contends that its elimination from the competition was unreasonable because Leader met the RFP’s requirement by providing its own unambiguous statement that its accounting system had been audited and approved by DCAA, along with the 2008 DCAA audit report number and additional information. Id. In Leader’s view, this information was sufficient for the agency itself to independently confirm with DCAA the verification and audit of its accounting system. Id.

In response, the agency acknowledges that a DCAA audit report would have been an acceptable source of verification; however, it explains that the solicitation expressly required offerors to furnish verification from DCAA with its proposal. AR, MOL at 8; AR, seealso Supp. MOL at 3-6. In this regard, the agency also explains that the solicitation did not permit offerors to essentially self-verify the adequacy of their accounting systems. Rather, by requiring offerors to provide verification from DCAA, the agency would obtain independent verification that offerors’ accounting systems had been audited and determined adequate. Id.

When a dispute arises as to the actual meaning of solicitation language, our Office will resolve the matter by reading the solicitation as a whole and in a manner that gives effect to all provisions of the solicitation. SeeLevel 3 Commc’ns LLC, B-412854 et al., June 21, 2016, 2016 CPD ¶ 171 at 7; KAES Enters., LLC, B-411225 et al., June 18, 2015, 2015 CPD ¶ 186 at 5. A solicitation is not ambiguous unless it is susceptible to two or more reasonable interpretations. WingGate Travel, Inc., B-412921, July 1, 2016, 2016 CPD ¶ 179 at 7. If the solicitation language is unambiguous, our inquiry ceases. Id.

On this record, we find that the agency’s interpretation of the solicitation, when read as a whole, is reasonable, whereas the protester’s interpretation is not reasonable. Here, the solicitation stated that an offeror “must have verificationfrom [DCAA]. . . of an accounting system that has been audited and determined adequate” in order to be eligible for award. Id. at L-17 (emphasis added). The solicitation also advised that the agency would “evaluate evidence that the [o]fferor . . . [has] an adequate accounting system . . . as required under Section L.3.1.h.” Id. at M-3 (emphasis added). Finally, the solicitation cautioned that failure to “furnish verification of an adequate cost accounting system” would result in a rating of unacceptable and render the proposal ineligible for award. Id. (emphasis added). As explained by the agency, contrary to Leader’s contentions, the solicitation did not contemplate that an offeror could simply provide a declarative statement in lieu of the submission of evidence from DCAA verifying the adequacy of the offeror’s accounting system. See AR, Supp. MOL at 5. On this record, we find that the agency followed the clear and unambiguous terms of the solicitation and reasonably found Leader’s proposal unacceptable because it did not provide verification from DCAA that its accounting system had been audited and deemed adequate.[4]

Leader also argues that its proposal should nonetheless have been accepted because it satisfied the agency’s actual and reasonable needs, its acceptance would not result in unfair prejudice to other offerors or provide Leader with a competitive advantage, and it contained sufficient information for the agency to obtain additional verification or confirmation with DCAA. See Protest at 6; Comments at 7-8. We disagree.

Clearly stated RFP requirements are considered material to the needs of the government, and a proposal that fails to conform to such material terms is unacceptable and may not form the basis for award. AttainX, Inc.; FreeAlliance.com, LLC, B-413104.5, B-413104.6, Nov. 10, 2016, 2016 CPD ¶ 330 at 5; TYBRIN Corp., B-298364.6, B-298364.7, Mar. 13, 2007, 2007 CPD ¶ 51 at 5; National Shower Express, Inc.; Rickaby Fire Support, B-293970, B-293970.2, July 15, 2004, 2004 CPD ¶ 140 at 4-5. As explained by the agency, here, the requirement to provide verification from DCAA was a material requirement, the waiver of which would result in an inconsistent and unfair evaluation, thereby prejudicing other offerors. See AR, MOL at 6-7; AR, Supp. MOL at 7. Accordingly, we have no basis to sustain the protest.

Well, golly gee, what is next? Are we awaiting a disqualification because the DCAA audit is not fresh (over two years old)?

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

Supporting Material Overhead rate

DCAA auditor independence

DCAA’s right to change their mind in subsequent audits

Tax vs. Book on depreciation issues

Bonuses

Accrued Costs crossing fiscal year

Unapproved subcontractors

An excellent example of DCAA properly developing findings.

Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about developing findings and documenting consultants’ work products. Again, I am not a lawyer and this is not legal advice.

Developing Findings

The fact that I consider this topic worthy of discussion illustrates the reality that the failure of auditors to properly develop findings is an ongoing issue in too many DCAA audits. Way too often, the first time a contractor hears about a proposed finding is when it is proposed.

During a recent DCAA auditor, the auditor thought she could benefit from the research she did on me and my views by announcing her agreement with what she thought was one of my strong assertions:

“Well, we all know that the Contract Audit Manual. is not regulatory and only guidance”.

My response had a visible impact on her: “The CAM is guidance for contractors, but it is your standing orders. I would expect a DCAA auditor to follow those orders.”

Let us see what those standing orders in the CAM say about developing findings:

4-303.1(b) The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions.

6-708(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and when appropriate with the cognizant principal ACO and CAC, as soon as possible to expedite the resolution process (See 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC has any additional information which would support or modify the audit findings. This will enable resolution of the findings to take place prior to the completion of the audit. If agreement on an issue cannot be reached, the contractor should be requested to prepare a rebuttal for inclusion in the audit report. The process outlined above will result in an efficient audit that will conserve both audit and contractor personnel resources.

6-709(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and, where appropriate, with the principal cognizant ACO and CAC, as soon as possible so as to expedite the resolution process (see 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC have any additional information which would support or modify the audit findings

I simply cannot stress how many times simple misunderstandings were cleared up because the DCAA field operator brought it to our attention before taking it to their supervisor, and after that writing it up as a proposed finding. Heading off trouble at the earliest stages is an essential aspect of successful DCAA relationships.

One famous example was a DCAA auditor putting together this extensive spreadsheet that “proved” the contractor was calculating social security taxes incorrectly and that highly compensated employees were not paying their fair share of social security tax. He was still pretty embarrassed, but at least he had not written it up and sent it to his supervisor.

No one likes egg on their face and contractors should avoid watching DCAA auditors make fools of themselves. Sometimes this results a stubborn refusal on the part of some DCAA auditors to admit an error, such as my aggregating “Backspace Key Crisis”

In the TSI case, it appears time and time again that both DCAA (at least the second auditor) and DCMA bent over backwards in the attempt to allow the contractor to dispute the findings. Despite this, it appears DCAA and DCMA stuck to their guns only to find the appeals board disagreeing with the auditors on over half of their findings.

Documenting Consultants Work Product.

It is a pure joy to hear the appeals board admonish DCAA with the exact arguments I made time and time again. I will let the judges speak for themselves:

The government labors under the false impression that the FAR requires a consultant to create “work product” merely for the purposes of proving its costs (see R4, tab 16 at 258, 260; gov’t br. at 54-55, 64-66). Though the FAR language in question is not as clear as we might like, it can be read- as we read it here – to impose no such requirement, Moreover, we have factually found the invoices submitted by TSI to be adequate to support a finding that TSI incurred the charged costs for SMI’s marketing activities.

We begin by examining that language of the FAR that the government holds out as requiring the generation and provision of “work product” to entitle recovery of costs for professional and consultant services. FAR 31.205-33, Professional and consultant service costs, provides in relevant part that:

(f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service provided. work performed is proper and does not violate law or regulation shall include

(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;

(2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and

(3) Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

The government makes a superficially persuasive argument, that the FAR’s statement that the evidence necessary to determine that the work is proper “shall include … work products” and related documents, makes the provision of such documents mandatory (gov’t hr. at 54). The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed. We further note, that DCAA’s own audit manual, reflecting the government’s own interpretation of this FAR requirement, provides that, “[t]he auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.” DCAA Manual, at 58-2 – 58-3. Moreover, amongst the “Frequently Asked Questions” in the relevant portions of the audit manual are responses indicating that other additional evidence may be considered to determine whether the services were, indeed, provided and allowable. Id. at 58-7.

Thus, we conclude that FAR 31.205-33(f) may require the provision of a consultant’s work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. To be sure, any lack of work product makes it more difficult for a contractor to prove that it incurred the costs for which it seeks compensation, and the lack of work product in an instance where the consulting work was of such a scale or scope that work product would be expected may properly subject the costs to question. As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR 25 intended to impose “make work” upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.

Turning to the facts before us, we have found that the consulting agreements and the invoices provided, combined with the testimony given at the hearing, persuade us that the costs included in TSI’s FY 2007 ICP for SMI’s marketing services were, in fact, for that purpose and are allowable. This portion of the appeal is sustained.

The Armed Services Board of Contract Appeal is STILL down again for the second time in the last several months. I will not let this attack on democracy (although I am sure the government has an excellent reason for the prolonged denial of access to this information) stop our discussion of the TSI case.

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

Supporting Material Overhead rate

DCAA auditor independence

DCAA’s right to change their mind in subsequent audits

Tax vs. Book on depreciation issues

Bonuses

Accrued Costs crossing fiscal year

Unapproved subcontractors

An excellent example of DCAA properly developing findings.

Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about depreciation. Again, I am not a lawyer and this is not legal advice.

Depreciation

Depreciation and its evil sister Amortization often result in contractor upset stomachs and a desire to find a nice quiet spot somewhere where accountants can be beaten with long thin sticks. Tax and GAAP rules often differ significantly and can result in reconciling differences the contractor must track. To further add to this complexity, many accelerated tax depreciation methods are available for defined periods or under special conditions due to political decisions to impact the economy. Some depreciation methods are even restricted to certain neighborhoods (Okay, enterprise zones).

Too many contractors avoid this complexity and stick with a simple universal method for both tax and their financial (GAAP) books. This can cost the contractor real money but allows these individuals to sleep better.

TSI appears to have been one of those contractors who tried to keep tax and financial accounting together. Up until the year in question (2007), they depreciated their assets on a multiyear basis but in 2007 they ‘expensed’ out $26,198 in computer equipment of which $18,840 went onto the tax return as capital assets and expensed under Section 179. They claimed the full amount on the incurred cost submission.

TSI came up with an after-the-fact argument that reasonably argued some of the costs were not capital costs (short life), but admitted that not all of the costs fell into this category and could not identify the different equipment.

The Board took notice that TSI did not have any depreciation polices in 2007 or the previous years. In absence of contractor policies, the Board relied on consistency and noted that previous to 2007 the contractor utilized multiyear depreciation. As a result, TSI lost most of the 26k it expensed on the incurred cost proposal.

Depreciation policies and procedures are not specifically addressed in DCAA’s preaward audit program or in the government’s SF 1408. This is another excellent reason why contractors should adopt comprehensive policies and procedures and move past what DCAA looks at initially. The only real FAR restriction for small contractors, as noted by the Board, is not to charge the government more than is found on your financial books.

Depreciation Lessons

Depreciate Often and Wisely – Contractors should take advantage of tax benefits allowed and should set up systems that allow the differences between tax and GAAP to track easily by utilizing memorandum or reversing journal entries as a simple example. Many software programs offer to track this difference with little effort. This leads to the second point.

Policies and Procedures Protect and Explain – It is not just about compliance, excellent policies and procedures serve as a roadmap allowing a contractor to see where they have been (current policy and procedure) and figure out where they want to be (adapted policy and procedures). To phrase this in a way many of my engineering clients will appreciate: How can you begin to discuss modifications to a design without the current specification sitting in front of you? Policies and Procedures are your business specifications.

Excellent Policies and Procedures are Dynamic – Want to adapt accelerated depreciation? Look at your needs, GAAP, and other compliance issues and move forward. Just do not forget to include the changes on your Schedule M.

One final note, the Board, as is typical, ordered the government and TSI to recalculate the rates based on the Board’s decision. I wonder if there will be arguments on the allowable 2007 depreciation, given the lack of governing policies and procedures? I imagine they will eventually agree on the method used in previous years, but the DCAA may have question about those now that the light is focused on the issue. I am also curious if DCAA proposed disallowing ALL of the 2007 depreciation and the Board caught this.

The Armed Services Board of Contract Appeal is down again for the second time in the last several months. I will not let this attack on democracy (although I am sure the government has an excellent reason for the prolonged denial of access to this information) stop our discussion of the TSI case.

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

Supporting Material Overhead rate

DCAA auditor independence

DCAA’s right to change their mind in subsequent audits

Tax vs. Book on depreciation issues

Bonuses

Accrued Costs crossing fiscal year

Unapproved subcontractors

An excellent example of DCAA properly developing findings.

Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about DCAA’s right to change their mind in subsequent audits. Again, I am not a lawyer and this is not legal advice.

DCAA’s Right to Change Their Mind

The disagreement between the ASBCA judges and too much of the 61-page opinion addresses the question of DCAA’s changing its mind from audit to audit and from auditor to auditor. To sum up, the two judges in the majority believe DCAA has a broad right to do so, while the minority judge does not.

I am not going to quote their respective arguments, which coincidently coincides with their website unavailability, because I believe this is a horrible case to address the issue.

If DCAA audits, or chooses not to audit, a subcontractor’s invoices in 2012 and sees nothing wrong; this does not prevent them from looking at the subcontractor’s new invoices in 2013 and deciding there is something wrong. All of the extensive legal arguments between the judges aside, the ability to look at costs fresh from year to year is simply common sense to me. This is not absolute but generally true.

One obvious area where DCAA must change its opinion is when there a change in law, regulation, or GAAP.

Does this infer that I believe DCAA is allowed to change their mind at any time and without any constraint? NO, IT DOES NOT. I just believe, despite the pages and pages dedicated to the issue, that this was not the case to explore DCAA’s mind changing abilities.

Let us look at some areas where I believe DCAA’s ability to change its mind is limited.

Reasonableness

Underlying this, as is often the case with DCAA, is the fundamental issues surrounding burden of proof. DCAA auditors can propose findings based on two conclusions: first; the finding is based on a violation of statute, regulation, or GAAP[1]; second; the finding is based on DCAA’s assertion that the cost is unreasonable or imprudent.

If a subsequent DCAA auditor objects to a cost that a previous DCAA auditor allowed because the previous auditor missed an applicable regulation, then the new DCAA auditor is not only within rights to question, but is ethically obligated to proceed with the finding development. However; if the proposed finding is based on reasonableness (or unreasonableness), I believe the contractor enjoys a strong argument that the actions of the previous auditor establish the cost was reasonable and that the personal differences in auditors cannot form the basis for a finding.

Implicit in this is the assumption that both auditors actually sampled and audited the cost. If the first auditor did not actually sample and audit the cost, there is no assumption made.

Sometimes I believe the only person some DCAA auditors lacks respect for more than a contractor is another DCAA auditor. It does not surprise me that this second guessing occurs frequently, but I have now provided a basis for evaluation and objection.

For a closer look at burden of proof issues, look at these previous articles.

Documentation

Another common area where we witness disputes between prior and present DCAA auditors is regarding documentation. The first auditor accepts the documentation while the subsequent auditor does not. Again, there is the assumption the first auditor actually sampled and reviewed the documentation. Again, if there is a SRG issue, especially a change in one of them, I believe the subsequent auditor has the right to raise the issue.

In most cases, the difference arises out of a different interpretation of the SRG. A good example is how some auditors read the requirement for consultant documentation. We will discuss this thoroughly in a future article on this case, but I will just point out that the judges noted that the subsequent DCAA’s auditor’s interpretation of the regulation on consultant documentation was wrong.

Where the documentation is basically identical, the issue gets a bit trickier. As the recent Lockheed Martin case asserted (I would link it if the website was up), inadequate documentation is not a reasonable and prudent argument. Because of this the burden of proof that the documentation is inadequate rests with the government auditor. Now the auditor has to demonstrate the documentation is inadequate despite the previous auditor’s acceptance. I think that is a challenge, but not an impossible one.

Policy and Procedure

Where DCAA should respect prior audit opinions is in the area of a contractor’s policies and procedures, and accounting structure.

DCAA recommended approval of an accounting system is a positive assertion on their part that the contractor’s accounting system is adequate for government contracting purposes. This is done by the auditor signing the SF 1408.

Some consultants sign the SF1408 and argue that this is the contractor’s privilege. I absolutely believe this is contrary to the regulation and it also takes away the DCAA signature accepting your accounting system and the positive assurance I am talking about.

I would argue that if it is covered by the SF 1408, the contractor and the government is provided assurance by DCAA that the system, to include policies and procedures is adequate.

“A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives. (A contract is final cost objective.).”

There is a critical grammar mistake on the government’s part (is it “A contract is a final cost objective” or “A contract is the final cost objective”?).

Grammar question aside, an approved SF 1408 is an approval of the contractor’s allocation method (Total Cost Input, Value Added, or otherwise). DCAA should not subsequently object to the contractor’s allocation method unless there is a change (SRG or internal).

The SF 1408 is not comprehensive even if your policies and procedures are. Unfortunately, this does not mean that, as part of the process, when you send DCAA your hundred-page accounting policies and procedures you can assume they are all approved. I would only assume the ones covered by the SF 1408 are.

The best example of this are bonuses, which are not addressed in the SF 1408.

TSI believed they addressed the issue with DCAA. Their bonus plan was new to the year that was the subject of the audit findings and the appeals case. Before the submission they started a discussion on the bonus plan with DCAA :

“Mr. Fletcher testified that he met with DCAA auditor Marie Pepin for approximately two hours on 28 February 2008 to discuss the ICP for FY 2007 that would be submitted later in 2008, and raised the executive bonus plan with her during this discussion (tr. 2/121-22). According to Mr. Fletcher, Ms. Pepin said words to the effect of “this looks good to me,” and then they moved on to other subjects (tr. 2/123). We find, as a matter of fact, that this discussion was relatively short and superficial in nature and did not constitute any representation that the government gave final approval to the bonus plan as proposed or executed.”

I wonder if the court would have thought differently if TSI had employed my recommended procedures and followed up the meeting with an email documenting the agreement and attaching the plan?

If TSI had sent that email, we might have had a good case for deciding when and how DCAA can change its mind, even if DCAA ignored the email.

[1] I am going to refer to proposed findings based on statute, regulation or GAAP as “SRG” for the rest of this article.